Peak Oil Review
Vol. 5 No. 7
February 15, 2010
Tom Whipple, Editor
Steve Andrews, Publisher
1. Prices and Production
Oil prices rose modestly last week on conflicting news. The week began with a strengthening US dollar, colder weather in the US, and increasing tensions with Iran all contributing to higher prices. By week’s end, however, lower US demand, concerns about China’s potential for continued rapid economic growth, and growing sovereign debt problems in the EU dropped prices slightly from a week’s high of above $75 to close Friday at $74.13.
Heavy snow in Washington delayed the publication of the weekly stocks report until Friday. The report showed crude stocks increasing by 2.4 million barrels and gasoline stocks by 2.3 million. Distillate stocks fell by a less-than-expected 350,000 barrels despite the extreme weather conditions in much of the US and showed that US demand for oil products continues to sag.
At the end of the week there was much skepticism about EU efforts to prevent a Greek default which in turn led to a weaker Euro and upward pressure on oil prices.
The Iranian nuclear standoff took a turn for the worse last week as a heavy security crackdown during the anniversary of the Islamic Revolution celebrations appears to have kept anti-government demonstrations scattered and isolated. President Ahmadinejad announced that Iran had made its first batch of 20 percent enriched uranium and was now a “nuclear state.”
The US appears to be tiring of efforts to establish a diplomatic dialogue with Tehran and is considering harsher sanctions. Moscow too seems to be shifting as a spokesman asserted that Western fears over Iran are valid. Some observers say that even the Chinese are becoming less strident in their support for the Iranians, thereby signaling that a policy shift may be coming. While it is too early to talk of oil supply disruptions from the area, the possibility that the situation may get out of hand remains an ongoing concern.
The IEA is now forecasting that world oil consumption will return to its 2007 level of 86.5 million b/d this year, an increase of 1.8 percent. This prediction is based on the assumption that China’s oil consumption will grow by 4.7 percent this year to 8.9 million b/d.
2. China’s Growth
Beijing’s latest clamp down on bank lending was the top economic story last week. From a peak oil perspective the issue is clear. Should Beijing continue to increase its oil consumption at 4-5 percent a year much longer, such an increase, coupled with those of India and other growing Asian states, is almost certain to bring about shortages and rapid oil price increases over the next 2-3 years. Alternatively should what many see as a great largely housing bubble burst, the repercussions could defer higher oil prices for a considerable period of time.
When the slowing global economy led to a severe drop in Chinese exports two years ago Beijing sought to compensate with a massive—in comparison to their GDP—lending spree and stimulus package. As household consumption in China is flat to falling, most of the money went to transportation infrastructure, industrial expansion and, above all, housing.
For a time all went well, with annual GDP growth rebounding to the vicinity of 10 percent, with imports of oil and other commodities surging amid forecasts that growth would continue. However, an increasing chorus of outside observers and even China’s government are finding all this growth unsustainable. In the face of stagnant exports, China’s growth has come from a massive surge of bank lending to finance overcapacity in housing, transportation and industry. Last month bank lending increased so rapidly that Beijing took what is likely to be one of several steps in their attempt to rein in inflation.
The underlying problem is that China’s economy is being artificially forced to grow much faster than exports or domestic household consumption justifies, thus a day of reckoning is coming. Outside of disruption of oil supplies from a major producer, the growth of China’s economy is probably the most important issue facing the world’s oil supply. Continued growth will lead to higher prices and shortages in the next few years while a faltering Chinese economy could set higher prices back for an indefinite period.
3. India
The Indian economy, with 1.1 billion people, also has continued to grow rapidly in recent months and is now forecast to achieve a 7.2 percent GDP increase for the year ending in March. Total energy consumption is forecast to grow at 5-6 percent a year. As in China, Indian industrial production continues to grow rapidly with factory output increasing by 16.8 percent in December.
Although India is said to have the world’s fourth largest coal reserves, production at around 400 million tons per year is not keeping up with economic growth. The government is expecting a 15 percent shortfall by 2012. To compensate for domestic shortages, India, in competition with China, is starting to import increasing amounts of coal which is bound to lead to higher prices shortly.
Some observers say that India had better start locking in long-term coal import contracts soon or face shortages that will harm economic growth. A series of government commissions have concluded that it is time to end India’s oil subsidy program which keeps domestic oil prices well below the world market. In anticipation that prices will be much higher five or ten years from now, they are saying it is better to stop the subsidies and let the economy adjust sooner rather than later.
Quote of the Week
• “The work of the Industry Taskforce on Peak Oil and Energy Security shouldn't be disparagingly dismissed. Its arguments are well founded and lead it to the conclusion that, while the global downturn may have delayed it by a couple of years, peak oil—the point at which global production reaches its maximum—is no more than five years away. Governments and corporations need to use the intervening years to speed up the development of and move toward other energy sources and increased energy efficiency.”
-- Patience Wheatcroft, The Wall Street Journal
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
• Kuwait aims to boost crude oil output capacity to 4 million b/d by 2020, Kuwait Oil Co.’s Mohammad A. Husain said. The country will maintain this output level to 2030, he said at a conference in Abu Dhabi last Monday. (2/8, #9)
• Chevron and Repsol will lead development of two $15 billion projects to pump and refine Venezuelan crude after winning the country’s first oil auction since President Hugo Chavez took office 11 years ago. (2/11, #8)
• In Venezuela, the block to which Chevron recently won the rights, "Carabobo 3," can produce up to 400,000 barrels a day once peak production is reached in about five years, the Venezuelan government says. (2/12, #10)
• Petroleos Mexicanos, the state-owned oil company, may pump 2.3 million barrels of oil a day this year, down 11.6% from 2009. (2/12, #11)
• The cost of discovering each new barrel of oil has risen three-fold over the last decade as technology has pushed the frontiers of exploration into ever more remote areas. Even established oilfields, such as those in the North Sea, now have breakeven costs of around $50 per barrel. (2/11, #3)
• Nigeria's new acting president, Goodluck Jonathan, is attempting to breathe life into the nation's ailing energy sector just two days after assuming the duties of President Umaru Yar'Adua, who has been out of the country since November with health problems. Mr. Jonathan is Nigeria's first president from an ethnic minority of the Niger Delta (2/12, #9)
• Nigeria's oil production could slip to 1.9 million b/d in February if militants carry out their threats to resume attacks against the country's oil industry, the IEA said Thursday.(2/11, #10)
• Argentina’s government lodged a protest with UK’s government over plans by UK firms to begin oil exploration off the north coast of the long-disputed Falkland Islands. (2/9, #12)
• Argentina has detained a cargo vessel it claims recently delivered oil drilling supplies to the Falkland Islands, stepping up pressure on the UK to halt planned oil exploration activities in the region. Argentina claims the Falklands and surrounding waters are under illegal UK occupation. But the UK, which won a war with Argentina in 1982 over the islands, stands by its right to grant the drilling concessions. (2/13, #5)
• Russian President Medvedev lent support to the idea of tightening state control over oil and refined products exports but stopped short on Friday of adopting proposals that would have effectively restored the Soviet-era monopoly. During the last decade, the Kremlin has increased its share in the Russian oil producing sector to 50 percent after reducing it to as low as 30 percent following the collapse of the Soviet Union and mass sell-offs of state property in the 1990s. (2/13, #7)
• Ghana blocked the estimated $4 billion sale of a stake in a huge oil field, foiling months of talks between potential buyer Exxon Mobil and the stake's owner, Kosmos Energy. The decision is the second recent setback for Exxon's expansion plans in Africa, after an attempt to buy a stake in a big Uganda field also fell through. The opposition also shows how resource nationalism remains strong--despite hopes that more moderate oil prices caused by the recession would somehow make national governments more flexible. (2/10, #10)
• NRMA Motoring & Services, one of Australia’s biggest motoring organizations, is calling for government support of alternative fuels. The organization published an independent report it commissioned which warns of energy security problems and peak oil. (2/10, #4)
• Lucio Pimentel, with Petrobras’ press management office, followed up with a clarifying comment about a post on The Oil Drum last week. Specifically, he stated that Petrobras “does not believe it is possible to predict a peak oil date. In particular, we do not believe it will happen in 2010.” (2/12, #25)
• In Uganda's oil fields, the British company Tullow Oil was expected to announce last week that it will sell half of its stakes in Uganda to a Chinese company at $2.5 billion. (2/9, #8)
• Turkmenistan, holder of the world’s fourth-largest gas reserves, is seeking bids from foreign producers to develop untapped Caspian Sea deposits as Europe, Russia and China compete for supplies. International oil companies have sought access to the country’s inland gas resources, while spurning less explored offshore deposits. Only China’s CNPC has succeeded in signing an onshore production-sharing agreement in 2007. (2/12, #8)
• Gazprom, the world’s largest natural-gas producer, won its last permit to build a $10 billion, 758-mile pipeline to Germany, its first direct link to western Europe. (2/12, #24)
• Citing “changes in the market situation and particularly in the LNG market,” Shtokman Development AG has delayed by 3 years the start-up of production from Shtokman gas-condensate field in the Barents Sea. The partnership of Gazprom, Total, and Statoil said final investment decisions on pipeline gas will be made in March 2011 and on LNG before the end of 2011. That schedule will allow for the start of pipeline gas production from the 135 Tcf field in 2016 and of LNG in 2017. (2/9, #17)
• One of the reasons Russia is delaying development of their massive Shtokman gas field is the shale gas phenomenon in North America that has effectively decimated the need for imports of LNG. The cost of developing this technically demanding field in the Russian Arctic simply can't compete with what it costs to bring on production from US shale plays. (2/11, #6)
• Exports of Colombian gas to Venezuela declined to 60 million cubic feet per day (cbpd) in January compared with an average of 179 cbpd last year, the US oil company Chevron reported on Tuesday. The declines match increasing demand in Columbia, in part to offset less hydropower. The sharp decline in gas supply could further increase energy problems in the western region of Venezuela. (2/11, #13)
• US drilling activity continued to climb, up by 11 rotary rigs to 1,346 working this week, Baker Hughes Inc. reported. Canada’s rotary rig count declined by 6 to 551 still active, compared with 421 rigs working in the same period last year. (2/13, #6)
• With natural gas prices high, the US domestic fertilizer industry has shrunk. Between 1999 and 2008 production plunged nearly 40 percent, according to a USDA report. But demand for nitrogen—the juice that keeps those big corn crops coming—rose steadily. To fill the gap, we now import more than half of the nitrogen we consume, compared to about 15 percent just a decade ago. Our three largest suppliers: Trinidad and Tobago, Canada, and Russia/Ukraine, which account for 56, 16, and 14 percent of imported N, respectively. (2/13, #8)
• EIA expects total US natural gas consumption to increase 0.4% to 62.5 bcfd in 2010 and another 0.4% in 2011. It also forecast that total marketed gas production will decline 2.6% to 58.7 bcfd in 2010 and increase by 1.3% in 2011. Projected US pipeline imports will fall by 8.3% to 8.1 bcfd this year from the sustained impact of lower Canadian drilling and production and from increasing demand from oil sands projects. (2/12, #20)
• The price of natural gas, the worst-performing US energy futures contract of 2009, is on the verge of further declines when colder-than-normal weather and blizzards that have propped up demand from Chicago to Baltimore come to an end, said Porter Bennett, CEO of Bentek Energy, which tracks North American gas output and shipments. (2/11, #19)
• EnCana CEO Randy Eresman said their earlier natural gas price outlook of $5.50/MMBtu in 2010 and $6.50/MMBtu in 2011 may now be too high. (2/12, #21)
• The gas industry managed to slip into the 2005 energy bill an exemption from EPA review of the special drilling that shale formations require. Congress should repeal that provision. (Boston Globe editorial) (2/8, #17)
• Pennsylvania Gov. Rendell said his state will strengthen its enforcement capabilities to protect residents and environment from the impact of increased exploration for natural gas in the Marcellus shale. (2/12, #22)
• Wind generation shortfall in the UK: During a low ebb within the recent cold snap, only 0.2 percent of a possible five percent of the UK’s electrical power generation came from wind. On average, they operated at just 16 percent throughout the cold spell. The UK has set new targets under which 6,400 turbines are supposed to provide a quarter of all the country’s electrical generation requirements by 2020. (2/13, #10)
• China’s January electricity consumption jumped 40.1 percent from a year earlier as an economic recovery in the world’s second-biggest power producer spurred demand from factories. Demand for electricity is likely to grow 9% this year vs. 7% last year. (2/12, #15)
• China Investment Corp., the nation’s sovereign wealth fund, invested for the first time in the US Oil Fund, an exchange-traded crude-futures fund, joining Morgan Stanley & Co. and Goldman Sachs Group among the top holders. China Investment became the fourth-largest holder in the Oil Fund by buying 2 million shares worth $78.6 million. (2/9,#14)
• Get ready for the Simmons Plan. Hatched by Houston investment banker and Peak Oil worrywort Matt Simmons, here’s the gist: 1. build the world's biggest windfarm off the windy coast of Maine. 2. Use the electricity generated to desalinate and de-ionize sea water. 3. Use that water, plus electricity and air, to manufacture ammonia. 4. Pipe the ammonia to shore and use it to power a new generation of cars. (2/11, #26)
• Venezuelan President Chavez declared a national “emergency” in the electricity sector as the country’s worst drought in 50 years dries up water supplies in hydroelectric dams. The government has ordered rolling blackouts throughout the South American country to prevent a collapse of the power grid. Energy users will get a discount if they cut consumption but face price rises if their usage does not fall. (2/9, #9, #10)
• Climate change and US reliance on fossil fuels could have “severe consequences,” including potential surges in oil prices and risks to national security, the White House Council of Economic Advisers said today. (2/12, #19)
• The Obama administration proposed $36.5 billion of new oil and gas taxes as it released its proposed fiscal 2011 budget. The proposed levies—which it framed as removing tax preferences to help balance the federal budget and promote clean energy—were essentially the same as the ones it presented a year earlier. (2/9, #16)
Two Short Commentaries: Green Jobs Race Lost?
By Roger Baker
(Note: Commentaries do not necessarily represent the editing and publishing team’s positions; they are personal statements and observations by informed commentators.)
There is discomforting new green jobs data that suggest the USA might have already lost much of its technology leadership to green energy development abroad, including wind, PV energy, and electric cars. http://abcnews.go.com/WN/wind-power-equal-job-power/story?id=9759949 Perhaps we have an entrenched private energy investment mindset, less flexible than our green energy competition in China, etc. It may take a crisis or pervasive discontent to shake up the status quo.
Austin, Texas, like many other areas, had recently anticipated being a leading green energy development center. However, a lot of the anticipated venture capital has dried up, probably shifting a lot of the burden of industrial development to the federal level: http://theragblog.blogspot.com/2010/02/austin-and-texas-economic-slump-finally.html
If so, why not shift the US investment policy to play to long-run global US trading strengths? Why not subsidize research that could lead to the restructuring of US food production based on energy efficient agriculture? Why not publicly fund sustainable-agriculture research, even before rising food prices force such a shift?
Basic farming technology is probably a good example of what needs to change in an era of increasing resource constraints. Electric tractors already exist, but their improvement and promotion through private effort is minor when compared to the public money devoted to GM. http://www.econogics.com/ev/etsites.htm
Why not develop a five or ten year crash program to electrify much of US agriculture? Why no basic research on automated tractors? Presumably we could design tractors to follow optimum curved rows for terracing, and to memorize and automatically repeat the same path over all the various stages of crop production. This would have many advantages by saving water and energy. Obviously such a program would benefit from steady government sponsorship.
It is likely that traditional grain and soybean production in the Midwest will remain major sources of calories in the US diet well into the future, augmented with more locally grown produce and less meat. It is reasonable to advocate planning a new industrial policy for agriculture based on expert opinion and an improved appreciation of how US agriculture is likely to fit into an energy-limited global economy.
**************************************************
and, Keynesians Discover Oil
The predominantly Keynesian Levy Economics Institute at Bard College in New York state has developed some of the best quantitative models to explain how various the interacting trade and macroeconomic factors affect the global economy. One interesting recent addition is that the Levy Institute economists have recently begun to understand how central and unique oil is to the global economy. See the Dec. 2009 paper; "Sustaining Recovery: Medium-Term Prospects and Policies for the US economy". http://www.levy.org/pubs/sa_dec_09.pdf
"...The government should devote more effort and money to developing alternative energy sources and encouraging energy conservation, as a devaluation alone would not have a large impact on oil imports. Such initiatives dovetail with other efforts to improve air quality and slow global climate change..."
The Levy group is making what are likely optimistic assumptions that imply that no matter what the price of oil, the US faces the necessity of devaluation due to the factors pushing continued deficits. The Levy group sees that after any kind of dollar devaluation, importing oil at its world market price is going to be a growing problem for the US economy. They thus advise a crash program to develop energy alternatives and develop national self reliance (although likely without reading the Hirsch Report and trying to determine the timing requirements).
They also assume that the global price of oil in current dollars will only rise by 2% a year in the midterm. Those of us who see oil as peaking in the next few years may well conclude that this oil price forecast is probably too optimistic. Thus the difficulty of a smooth-landing type of dollar devaluation would be made more difficult than their models suggest.
The background problem, as they see the politics working out, is that the current government stimulus spending tends to become a permanent commitment. They suppose that Obama cannot for political reasons reduce government support for the investment banks or jobs programs. The downside is that the resulting deficit necessarily destabilizes the dollar.
However, the federal stimulus spending policies that Keynes prescribed to revive a deflating domestic economy tends to undermine the other function of the dollar as a standard reserve currency. A continuing large US deficit is likely at some point to cause a collapse of global confidence, a panicky self-reinforcing dumping of dollars, or perhaps hyperinflation and no end of bad results. The conclusions of the Levy economists in this respect echo the warnings of the political conservatives who oppose Obama's stimulus spending.
The best hope seen is to achieve an orderly depreciation of our dollar, reflecting its shaky status as an unbacked global standard reserve currency. The alternative option would be an abrupt and disorderly collapse of the dollar as a standard reserve currency, with unpredictable global economic chaos in its wake.
But devaluation would send domestic oil prices soaring again, which would depress the already fragile US economy. Therefore, the authors of this analysis advocate that the dollar be carefully and gradually devalued by mutual agreement with China if possible, with the continuing stimulus being oriented toward energy restructuring to match.
The proposed course of controlled dollar devaluation treatment amounts to a serious, harsh, unpleasant medicine, involving lots of targeted government intervention. Sort of like chemotherapy; a most unpleasant experience but clearly better than the alternative.
Roger Baker is an Austin-Texas-based, transportation-oriented environmental activist, recently with a particular interest in energy-oriented economics. He is a founding member of and an advisor to ASPO-USA, is active in the Green Party, the ACLU, and others. He writes for the Texas-based cyber-journal, "The Rag Blog".